Globalization can be defined as the improving ability of individuals and
businesses to reside in or do business in countries other than their home
country and the increasing interaction of people, businesses and governments
across national borders.

Globalization is not new. From prehistoric times, people have traded goods
across wide areas. Columbus’s discovery of America was a result of a
globalization attempt by Spain. The British Empire was a result of globalization
of production activities. Globalization has ebbed and waned over the ages. Since
World War II globalization has been on a continual rise. The emphasis has been
on trade by firms. Government’s role has been to set an environment to allow
the firms to operate across national boundaries.

The driving forces for globalization include the following:

Media communications share information about standards of living and
qualities of life. Movies and television shows from the United States are
shown all over the world. These shows demonstrate a standard of living and a
quality of life that people try to emulate. This results in pressure on
governments to establish an environment in which people have the opportunity
to try to improve their standard of living. These shows also establish
standards for quality of life including personal freedom and exert pressure
on governments to move towards the democratic model of government.

Media communications, especially business magazines and books, share
information about business methods and opportunities. This provides a
sharing of best business practices and encourages competition among
businesses in various countries. Business firms put pressure on government
to improve the business environment so that they can compete in the global
market place.

Information technology is improving the ability of firms to conduct
business at multiple locations across the globe. Improvements in
communications and information technology provide for real-time information
exchange and permit management of widely dispersed operations.

Improvements in the speed and cost of transportation allow managers to
travel globally to perform their functions. The improving transportation
cost of transporting goods permits goods to be manufactured far from their
end markets. The improving transportation speed reduces the inventory needed
to accomplish remote production.

Education is providing common global knowledge about economics and
business methods. This levels out the playing field. Firms avail themselves
of this knowledge and adopt world-class business practices in order to
compete in a global marketplace

Multinational companies distribute management skills, knowledge, and
resources globally. The use of expatriate employees transfers knowledge to
other countries where there are production or marketing operations. The
local employees absorb the skills and knowledge that eventually finds its
way into domestic firms.

Governments and nations are attempting to maintain peace by establishing
interdependency with other countries. A country is less likely to go to war
with a trading partner on whose existence the prosperity of its populace
depends.

These factors put pressure on governments to establish an environment where
its citizens have an opportunity to improve their standard of living. They
pressure governments to move toward the democratic model of government and a
free market economy. They pressure governments to remove constraints limiting
where individuals and firms reside and limiting the ability to do business
across national boundaries.

Different governments will try different approaches to addressing these
pressures. Some will succeed more than others. Failures to compete may result in
trying alternative paths that may be destructive. There is some backlash going
on in France and United Kingdom currently. The electorate is moving towards the
left and electing socialist representatives. The trend towards privatization in
these countries seems to be slowing. However the collapse of the Communist Block
is a strong indicator that political freedom, economic freedom, and interaction
among nations is inherently a better model than restrictive political and
economic systems and isolationist policies. In spite of set backs in individual
countries, the current trend is towards political and economic freedom and
global trade. Characteristics of this trend include democratic forms of
government, free market economies, reductions in currency exchange restrictions,
less restrictive foreign direct investment policies, lowering or removal of
trade barriers including quotas, tariffs, and administrative barriers, and
privatization of industry.

The Changing World Order

As late as the 1960s, the U.S. dominated the world economy and world trade
picture. It dominated the world foreign direct investment picture. Large,
multinational U.S. firms dominated the international business scene. Roughly
half of the globe--the Communist world--was off-limits to Western international
businesses.

By 1993, the U.S. portion of the world output had diminished from over 40% to
24.6%. Much of the growth was in Asia. Japan grew from 5.5% to 13.3%.

In the period 1975-1979, the U.S. accounted for about 48% of foreign direct
investment in other countries (outflow). By 1990-1991, the U.S. outflow was down
to 18%. The U.S. was the recipient of about 32% of investment from other
countries (inflow). Inflows to the U.S. grew through the 1980s, representing
over half the investment inflows into larger industrialized countries. It fell
during 1990-1991 to about 23%. 6

Of the Top 260 in 1973

Of the Top 500 in 1991

United States

126 (48.5%)

164 (32.8%

Japan

9 (3.5%)

111 (22.2%)

Great Britain

49 (19.9%)

43 (8.6%)

France

19 (7.3%)

30 (6%)

Germany

21 (8.1%)

30 (6%)

Sweden

8 (3.1%)

17 (3.4%)

Canada

4 (1.5%)

18 (3.6%)

In 1973, U.S. firms accounted for almost one half of the world’s largest
multinational firms. Japan accounted for less than 4%. By 1991, U.S. firms
represented less than one-third of the largest multinationals, while Japan’s
firms represented over 22%.

Between 1989 and 1991 the Soviet Union collapsed and was replaced by 15
independent republics. Many of these former Communist nations seem to share a
commitment to democratic politics and free market economics. In addition many
countries in Asia and Latin America have also moved towards a commitment to free
market economics. These movements represent a tremendous potential international
business opportunity. China alone has 1.1 billion people, a huge and largely
untapped market. Between 1983 and 1991, annual foreign direct investment in
China increased from less than $2 billion to $11.8 billion. China’s new firms
are already proving to be very capable competitors and they are taking market
share away from Western and Japanese enterprises. In Latin America, investment
by U. S. firms increased from $29 billion in 1987 to $49 billion in 1991. U.S.
firms sold $58 billion worth of goods to Latin America in 1991.

Regional Economic Integration

Since 1945 there has been a movement toward regional economic integration.
The European Union and the North America Free Trade Agreement are examples of
these unions. Other unions exist in Asia and Latin America. The goal of these
economic integration activities is to create free trade zones in which barriers
to trade among member countries are removed. In some cases the goals include
full economic union (common currency, common tax rates, common monetary and
fiscal policy) and political union.

Regional economic integration can be seen as an attempt to achieve additional
gains from the free flow of trade and from investment between countries beyond
those attainable under international agreements such as the General Agreement on
Trade and Tariffs.